State Failure in India: Political?Fiscal Implications of the Black Economy

Summary The underground or ‘black economy’ has been a source of considerable concern to Indian public policy analysts since the mid 1960s. In this article we argue that the black economy played a critical role in the softening of the government budget constraint in the 1980s. It, inter alia , reflects a decline in the fiscal surplus accessible to the state. The origins and disposition of black income are traceable, it is argued, to petty bourgeois groups rather than to direct ‘corruption’ of the type identified in the rent?seeking literature.